Margins matter. The more Adobe Systems (Nasdaq: ADBE) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Adobe Systems' competitive position could be.

Here's the current margin snapshot for Adobe Systems and some of its sector and industry peers, and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Adobe Systems

89.4%

23.8%

11.7%

 Microsoft (Nasdaq: MSFT)

80.2%

39.5%

30%

 Ansys (Nasdaq: ANSS)

88.5%

38.5%

24.6%

 Oracle (Nasdaq: ORCL)

78.5%

36.7%

22.9%

 BMC Software (Nasdaq: BMC)

78.1%

26.6%

21.7%

Source: Capital IQ, a division of Standard & Poor's.

Unfortunately, that chart doesn't tell us much about where Adobe Systems has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter. You can't always reach a hard conclusion about your company's health, but you can better understand what to expect and what to watch.

Here's the margin picture for Adobe Systems over the past few years.


(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 94.3% and averaged 90.3%. Operating margin peaked at 37% and averaged 28.2%. Net margin peaked at 30.7% and averaged 22.1%.
  • Fiscal 2009 gross margin was 89.9%, 40 basis points worse than the five-year average. Fiscal 2009 operating margin was 24.8%, 340 basis points worse than the five-year average. Fiscal 2009 net margin was 13.1%, 900 basis points worse than the five-year average.
  • TTM gross margin is 89.4%, 90 basis points worse than the five-year average. TTM operating margin is 23.8%, 440 basis points worse than the five-year average. TTM net margin is 11.7%, 1,040 basis points worse than the five-year average.
  • LFQ gross margin is 88.6%, 120 basis points worse than the prior year quarter. LFQ operating margin is 25.3%, 190 basis points better than the prior year quarter. LFQ net margin is 15.8%, 210 basis points worse than the prior year quarter.

With recent 12-month-period operating margins below historical averages, Adobe Systems has some work to do. There may be some hope in the last quarter's results, but only time will tell.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. By keeping an eye on the health of your companies' margins, you can spot potential trouble early, or figure out whether the numbers merit Mr. Market's enthusiasm or pessimism. Let us know what you think of the health of the margins at Adobe Systems in the comments box below. Or, if you're itching to learn more, head on over to our quotes page to view the filings directly.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Microsoft is a Motley Fool Inside Value pick. Adobe Systems is a Motley Fool Stock Advisor choice. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Oracle. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.